Leveling the S&P 500

Plus avoiding the Social Security tax torpedo

Ric Edelman: It's Wednesday, November 27th. I got an email from Mark. He's in Rockton, Illinois.

Mark: “I am saddened to hear that you will conclude your podcast soon. I started listening to your weekly radio show back in 1999, read many if not all your books and learned such an incredible amount from you about the complexities of financial planning. When you transitioned from radio to your podcast, I was ecstatic and have since learned so much about blockchain and crypto.

Thanks to you and what I have learned, we have grown our investments into a quite sizable and comfortable retirement. I am hopeful that you will not totally disappear from the public scene. I will follow you at your website or wherever I can find you. You are an intelligent, inspirational, and a creative soul and I wish you all the best in exploring your next chapter of life.

I have one question that I hope you can educate me and your listeners. I feel that I may have not properly prepared for the tax implications of retirement. I have learned that there is this thing coined as the” social security tax torpedo.” That means up to 85% of our social security income will be subject to tax.

My understanding is that more and more retirees are becoming victims of this double taxation, and this has never been inflation-adjusted. Can you please shed more light on this subject?”

Ric Edelman: That's so sweet of you, Mark. Thank you. I appreciate your comments very, very much. It means a lot to me. Yes, I certainly can shed some more light on this subject for you, Mark. There's a bunch of taxes that go beyond ordinary income taxes. There's the net investment income tax. This hits people with modified AGI, that's modified adjusted gross income for $200,000 if you're single, $250,000 if you're married filing jointly. That tax is 3. 8%.

There's the AMT, the alternative minimum tax. That prevents people with high incomes from taking deductions they'd otherwise use to reduce their taxes. There's IRMA, the income related monthly adjustment amount. That's a surcharge on Medicare Parts B and D. And again, it hits singles with incomes above $103,000 or marrieds with $206,000 of income.

But you asked about what people call the social security tax torpedo. You might have to pay taxes on your social security benefits. It's true. The tax is based on something called your provisional income. That's essentially your AGI, your adjusted gross income, plus nontaxable interest income, plus half of your annual social security benefits.

If you're single and your provisional income is more than $34,000, or if you're married and your provisional income is more than $44,000, you might have to pay taxes on as much as 85% of your Social Security benefits. That means that every additional dollar of income you earn could have a double impact.

You'll not only pay taxes on that dollar of extra income, but that dollar of income could push you into a higher income level, which suddenly means you're also now paying taxes on a portion of your social security benefits that you weren't paying before. And that means the extra social security tax could be more than the extra income you actually earned. Meaning, maybe you might be better off not earning that extra income.

There are a lot of ways to avoid this problem, like converting your IRA to a Roth, because those distributions are not subject to taxes if you're over age 59 and a half. It gets complicated pretty quick, so you need to talk to a financial advisor and a tax advisor to get help on all of this.

But as for your notion that this is all unfair? Dude, if you've been listening to me for all these years, like you say, you know that fair has nothing at all to do with taxes. Congress needs revenue. Well, we call that money. The only way Congress can get money is by taxing the people who have it. We just crossed $36 trillion in federal debt, and the annual federal deficit is $2 trillion, meaning we spent $2 trillion more this year than we collected in taxes.

And Donald Trump has promised all kinds of tax cuts. No taxes on tips, or no taxes on Social Security, or no taxes on overtime pay. This is only going to reduce the revenue and increase the deficit. And that's why Trump is simultaneously trying to cut the federal budget. You know, this is what Elon are working on with their DOGE cost cutting program. And Trump wants to raise tariffs, too, to raise more money.

But my point is this. We have a huge fiscal problem. And the only way to get out of it is to get more people to pay more in taxes. You can cry about this all you want, but you're going to be crying while writing those checks. All I can suggest is that you go in the other direction. Make so much money, have so much income, that taxes are just another cost of living.

The alternative is to cut your income so much that you cut your taxes, but you also live in poverty. Bad idea. So I want to help you with the first idea. Increasing your income, increasing your wealth.

You know you're not going to get rich by working. There are a few athletes and celebrities who make big incomes, but, you know, maybe some big deal CEOs, but most of us, we make limited incomes. The key to creating wealth for the rest of us is therefore to invest the middling income we earn and let those investments we make, make us wealthy.

The key, therefore, is to invest often, for years, even decades, so you can let compounding do its thing. And then we want to reduce our risk along the way by being diversified. The problem is that these days, the way the market operates, you might not be as diversified as you think.

There are only now just a handful of companies that are responsible for the bulk of the returns of the entire S&P 500. The result is that even if you own a fund that mimics the S&P 500 index, you're still really suffering from market concentration, and that's because the S&P is cap weighted. I've complained about this a lot. For example, the smallest 50 companies in the S&P 500, they only get 1% of the index, meaning if you invest in the S&P 500, the smallest 50 companies only get 1% percent of your investment. The other 99% goes elsewhere, but those smallest 50 companies that only got 1% of your investment for the past 20 years, those stocks grew 4% more than the biggest 50 companies in the index.

This is why I want to suggest that you look at alternative strategies to improve your diversification to make it the way you really want it to be. These are two ETFs from one of my sponsors. There's the Invesco S&P 500 Equal Weight ETF (RSP) and the Invesco Discovery Mid Cap Growth Fund ETF (OEGAX)

Let's look at the first one, RSP. That's the ticker symbol for the Invesco S&P 500 Equal Weight ETF. With RSP, you still own the S&P 500, but now you own it equally, all 500 of those stocks in equal proportion. The result is that you get an exposure that tilts more towards smaller companies than the bigger ones, and this reduces your concentration risk.

And the Invesco Discovery Mid Cap Growth Fund, that ticker is OEGAX. This fund seeks capital appreciation. It invests in mid-cap growth stocks. Many people call that the sweet spot of investing. Mid-cap stocks often give you the best features of large companies and small companies. They grow faster than bigger, more mature companies, but they have less volatility than the small newer startups. So if your goal is to own a long-term diversified portfolio, you need to go beyond the classic S&P 500. Look at an equal-weighted fund and one that focuses on mid-caps.

RSP and OEGAX. They can help you check off both of these boxes, and they're both managed by Invesco, one of the world's largest independent investment management firms. They serve individual and institutional investors across North America, Europe, the Middle East, Africa, Asia and the Asia Pacific. They’ve got 8,600 employees in 120 countries. They manage $1.4 trillion. I think they can do a pretty good job for you. Learn more at Invesco.com or ask your financial advisor. By the way, Invesco.com, I love their website, ton of educational content, financial literacy info, a 529 plan education center, a tax center, lots of online tools for bond laddering. There's an RMD calculator, a lot more, all of it at Invesco.com.

If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

And have a Happy Thanksgiving tomorrow. My team and I are taking the rest of the week off for the holiday. So, we'll see you on Monday.

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Links from today’s show:  

Invesco S&P 500 Equal Weight ETF (RSP) https://www.invesco.com/us/en/etf/sp-500-equal-weight-rsp.html

Invesco Discovery Mid Cap Growth Fund ETF (OEGAX) https://www.invesco.com/us/financial-products/mutual-funds/product-detail?audienceType=Advisor&productId=FUND-31730

Invesco website: Invesco.com

12/9 Webinar - What the Election Results Mean for Crypto: https://dacfp.com/events/what-the-election-results-mean-for-crypto

12/10 Webinar - The Retirement Revolution: ETF Solutions for Modern Retirement Planning: https://www.thetayf.com/pages/the-retirement-revolution-etf-solutions-for-modern-retirement-planning

2/24-2/26 Wealth Management Convergence-2025 https://www.thetayf.com/pages/convergence-2025

11/13 Webinar Replay - An Innovative Way to Generate Income in a World of Declining Rates: https://www.thetayf.com/pages/november-13-2024-an-innovative-way-to-generate-income

10/9 Webinar Replay - Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/

Certified in Blockchain and Digital Assets including Crypto Taxation Course/Webinar: https://dacfp.com/certification/

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Brought to you by:  

Invesco QQQ: https://www.invesco.com/qqq-etf/en/home.html

State Street Global Advisors: https://www.ssga.com/us/en/intermediary/etfs/capabilities/spdr-core-equity-etfs/spy-sp-500/cornerstones

Schwab: https://www.schwab.com/

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